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Note 15 - Contingency
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12 Months Ended |
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Dec. 31, 2011
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| Legal Matters and Contingencies [Text Block] |
Note
15 – Contingencies
Acquisition
of Winder
On
April 1, 2008, Deer International acquired 100% of the
equity interest in Winder from 50HZ Electric Limited
(“50HZ”). At the time of such acquisition,
Deer International was an offshore enterprise
controlled by some of the Company’s shareholders
who are PRC residents. Certain of these shareholders
also owned or controlled 50HZ at the time of such
acquisition, which made Winder an affiliated PRC
company of such shareholders. In October 2008, such
shareholders transferred their ownership interests in
50HZ to an unrelated third party, after which 50HZ was
no longer a related party of the Company. The
transaction was approved by the Economic Development
Bureau of Yangjiang High-Tech Industry Development Zone
(the “Yangjiang High-Tech Zone”).
The
acquisition of 100% of Winder’s equity interests
by Deer International on April 1, 2008, was free of any
consideration and conditions. Under applicable PRC tax
rules, any transaction between related parties shall be
priced on an arm’s length basis. The tax
authority has the right to investigate any related
party transaction and to make adjustment if it
finds the price not on an arm’s length basis. The
PRC tax authority would make adjustment by applying a
deemed arm’s length price to the transaction.
Given that 50HZ and Deer International had certain
related parties at the time of the Winder acquisition,
there is a possibility the consideration-free transfer
may be challenged and investigated by the PRC tax
authority. If the deemed arm’s length price
determined by the PRC tax authority during such
investigation is higher than the original cost that
50HZ paid to get 100% equity interest of Winder, such
excess amount would be subject to additional PRC income
tax. Although the Company believes 50HZ would be
responsible for the possible PRC income tax, the
Company understands it is common practice for PRC tax
authority to enforce the tax collection on the entity
at issue, which in this case would be Winder, and the
Company may be required to pay the possible PRC income
tax on behalf of 50HZ. According to the M&A
Regulations, the acquisition of Winder might require
the approval of Ministry of Commence People’s
Republic of China (“MOFCOM”). As the
interpretation and implementation of the M&A
Regulations are unclear, if the approval of MOFCOM is
required, the approval that 50HZ obtained from the
Yangjiang High-Tech Zone may be deemed incomplete and
the transferee, namely Deer International, may need to
obtain further approval from MOFCOM.
Pending
Litigation
On
March 28, 2011, the Company filed suit in the Supreme
Court of the State of New York, captioned Deer
Consumer Products, Inc. v. Alfred Little, et
al., Index No. 650823/2011, against a certain
blogger, “Alfred Little,” the website
SeekingAlpha.com and others. The Company claims in this
action allege the publishing of false and defamatory
statements by the defendants as part of scheme to
manipulate and depress the market for our common stock.
The Company is claiming compensatory and punitive
damages totaling at least $11 million, not including
claims for attorneys’ fees, and other equitable
remedies, including disgorgement of any illicit trading
profits received by the defendants in connection with
the alleged market manipulation scheme. On
August 29, 2011, the Company obtained a Court order
allowing us to effect service of the summons and
complaint upon defendant Alfred Little via email and
related notice. We effected service on
Alfred Little pursuant to that order and on September
29, 2011, Alfred Little filed motions to dismiss the
complaint for lack of personal jurisdiction and for
permission to appear anonymously as a party in the
litigation. In addition, on August 31, 2011, the Court
granted defendant SeekingAlpha.com’s motion
to dismiss our claim against it on the ground that a
Federal statute, the Communications Decency Act, 47
U.S.C. § 230, precluded the claim against
SeekingAlpha.com. On September 29, 2011, the
Company filed a notice of appeal of this
decision. If the Company decides to go
through with the appeal, it must file a brief
“perfecting” the appeal no later than June
29, 2012. On January 27, 2012, the Court denied in part
Alfred Little’s motion to dismiss the complaint
for lack of personal jurisdiction and permitted the
Company to conduct discovery on the issue of personal
jurisdiction after a confidentiality agreement was
reached between the parties. The court also
requested that Alfred Little submit to the Court
evidence corroborating his allegations of potential
risks of physical harm for in camera
review. On February 17, 2012, the parties
reached a confidentiality agreement. On
February 23, 2012, after an in camera review of the
evidence presented by Alfred Little, the Court
permitted Alfred Little to proceed anonymously until
the Court decides the jurisdictional issue and
re-directed that the parties proceed with
jurisdictional discovery pursuant to the previously
ordered confidentiality agreement. The
Company has commenced discovery on the jurisdictional
issue.
On
April 29, 2011, a purported securities class action
lawsuit on behalf of the purchasers of the
Company’s common stock between March 31, 2009,
and March 21, 2011, James Rose
v. Deer Consumer Products, Inc. et al, was filed
against the Company and certain of its current and
former officers and directors in the United States
District Court for the Central District of California.
The court has not yet certified the class action
status. The complaint alleges violations of Section
10(b) and Rule 10b-5 of the Exchange Act, as well as,
in the case of the individual defendants, the Section
20(a) control person provisions of the Exchange Act.
The factual assertions in the complaint, based
expressly on the published statements at issue in the
Alfred
Little suit described above, consist primarily
of allegations that the defendants made materially
false or misleading public statements concerning the
Company’s financial condition in 2010 and 2009.
The complaint seeks unspecified damages and other
relief relating to the purported inflation in the price
of the Company’s common stock during the class
period. A consolidated amended complaint was filed on
September 6, 2011, with essentially the same
allegations. The Company filed a motion to dismiss the
lawsuit, which motion is fully briefed and has been
taken under submission by the Court. The
Company strongly denies the allegations in the
complaint. The Company believes this lawsuit is
frivolous and without merit and will contest it
vigorously. The Company plans to pursue all legal
remedies available to it if the complaint is not
withdrawn in its entirety.
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